“This trip was a case of rolling up the sleeves, burning the shoe leather and getting the low down on investment prospects in the residential market there…

I liked what I saw…

Auckland housing prices are definitely on the up…

Supply is currently tight…

Mortgage rates have never been lower. There is little to no motivation for the central bank to push rates up anytime soon…

Auckland will be the first port of call for most [Asian] newcomers…

The role of foreign buyers in the market right now should not be underestimated. They are a significant force, and most are Asians. A meeting with a long established lawyer friend this week said that his practice is dealing with 20 plus property transactions per week for Asian clients. He has taken on a small team of Chinese speakers to deal with this flow, and the deals are not just families buying a small apartment for own use or investment…

The majority of people checking out the bricks and mortar at “open homes” that I visited in the last week were Asian. That will become a familiar pattern to many major western cities if it is not already…

Having completed three trips in the past nine months to do my homework in this market, I am convinced that it is providing decent opportunities in a market that is recovering from the global financial crisis…

Right now I am buying residential property in Auckland”

Like I said, I bought Auckland residential real estate. The chart below gives you an idea of where’s it’s gone since mid-2013…

I’m not interested in bragging. I’ve been actively investing in real estate for over three decades across the globe. And this is far from the best real estate trade I’ve ever made.

But rather I want to share two key lessons with you today.

Lesson Number 1: Do what you can to front-run Chinese money.

There’s a lot of speculation these days about MSCI including China into their stock market indices and the potential inflows of money into Chinese stocks.

That’s great and there will be opportunities for sure. But for the time being I think people are looking in the wrong direction completely…

Let me explain.

China was the world’s second largest outbound direct investor last year behind the United States.

Mainland China actually became a net capital exporter for the first time ever.

Around two-thirds of those outflows were from the private sector. This is the first time that China’s private enterprises have overtaken the state-owned enterprises.

There will continue to be hiccoughs along the way. We saw what can happen when some markets say “enough is enough”. Vancouver’s recent 15% tax on foreign property purchases was clearly aimed at Chinese buyers and has triggered a subsequent correction.

And we’ve seen some M&A deals blocked here and there (for anti-trust or ‘strategically important’ reasons). But these outflows are far from over.

So go ahead and figure out where the Chinese are headed… and get there before them!

From everything I’ve seen and continue to see, Chinese buyers are cash rich and happy to overpay.

Lesson Number 2: Follow My Rules for Buying Real Estate.

The Auckland property market is up around 45% since mid-2013.

I paid NZ$440,000 for an apartment in downtown Auckland back then. And I put about NZ$150,000 into giving it a full makeover.

Given recent transactions in the building along with conversations with agents, I could likely get north of a million for it today. [And believe me, it would be sold to a Chinese buyer!]

But what’s my point here? Well, this property has returned closer to 70%. Not 45%.

Why the out performance?

Because I followed the same basic real estate investment rules that I’ve been using for decades.

We use them in the Hong Kong private equity real estate vehicle that I help manage and own a share of.

And these are the same rules I talk about to investors today as we go about raising money for our second private equity real estate vehicle here in Hong Kong.

They’re not overwhelmingly complicated!

In a nutshell, just think:

Renovate, Re-position, Upgrade, Leverage & Location…

Note: using 50% leverage, combined with my rules, is what transformed my return-on-equity in this case from 69% to 170%.

There’s a bit more to it than that of course, but I’m giving you the high-level essentials here.

Good investing,

Peter Churchouse

About Peter Churchouse

Peter Churchouse spent decades in Hong Kong as the head of Asia Research and Regional Strategist at Morgan Stanley, one of the world’s top investment banks, and as a real estate investor. He is the editor of The Churchouse Letter.

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